BENEFIT PLANS

Retirement Savings Plan

Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $6,551, $6,677 and $2,535 during 2018, 2017 and 2016, respectively.

Deferred Compensation Plans

The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.

Post-employment Benefit Plans

The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:

Supplemental Executive Retirement Benefits Plan

The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011.

Key Executive Restoration Plan

In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $359, $289, and $268 of expense associated with this plan in fiscal 2018, 2017, and 2016, respectively.

Qualified Defined Benefit Retirement Plan

The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement. The plan accruals were frozen as of April 16, 2018 and employees are now permitted to participate in the Retirement Savings Plan subsequent to April 16, 2018.

Salary Continuation Benefits

The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.

Retiree Health Care Benefits

The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual.

The Company uses a June 30 measurement date for all plans.

The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30:



	Pension Benefits						Retiree Health Care Benefits
	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at beginning of the year	$	24,411		$	26,605		$	1,684		$	2,235
Service cost	124			126			19			29
Interest cost	729			687			52			63
Plan participants’ contributions	—			—			68			69
Benefits paid	(3,181		)	(1,562		)	(223		)	(237		)
Amendments	—			—			—			(245		)
Actuarial gain during year	(549		)	(1,445		)	(109		)	(230		)
Benefit obligation at end of year	$	21,534		$	24,411		$	1,491		$	1,684
Change in plan assets:
Fair value of plan assets at beginning of year	$	6,530		$	6,737		$	—		$	—
Actual gain on plan assets	516			578			—			—
Employer contributions	3,837			776			155			168
Plan participants’ contributions	—			—			68			69
Benefits paid	(3,181		)	(1,561		)	(223		)	(237		)
Fair value of plan assets at end of year	$	7,702		$	6,530		$	—		$	—
Funded status at end of year	$	(13,832	)	$	(17,881	)	$	(1,491	)	$	(1,684	)

The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive loss for the post-employment plans were as follows:



	Pension Benefits						Retiree Health Care Benefits
June 30,	2018			2017			2018		2017
Amounts recognized in the consolidated balance sheets:
Other current liabilities	$	3,298		$	2,814		$	220	$	220
Post-employment benefits	10,534			15,067			1,271		1,464
Net amount recognized	$	13,832		$	17,881		$	1,491	$	1,684
Amounts recognized in accumulated other comprehensive loss:
Net actuarial (loss) gain	$	(4,781	)	$	(5,798	)	$	1,121	$	1,167
Prior service cost	—			(35		)	554		922
Total amounts recognized in accumulated other comprehensive loss	$	(4,781	)	$	(5,833	)	$	1,675	$	2,089

The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:



	Pension Benefits
June 30,	2018		2017
Projected benefit obligations	$	21,534	$	24,411
Accumulated benefit obligations	21,534		24,411
Fair value of plan assets	7,702		6,530

The net periodic costs (benefits) are as follows:



	Pension Benefits									Retiree Health Care Benefits
Year Ended June 30,	2018			2017			2016			2018			2017			2016
Service cost	$	124		$	126		$	91		$	19		$	29		$	22
Interest cost	729			687			879			52			63			75
Expected return on plan assets	(472		)	(460		)	(491		)	—			—			—
Recognized net actuarial loss (gain)	424			872			913			(154		)	(181		)	(210		)
Amortization of prior service cost	27			86			86			(369		)	(271		)	(271		)
Recognition of prior service cost upon plan curtailment	8			—			—			—			—			—
Net periodic cost (benefits)	$	840		$	1,311		$	1,478		$	(452	)	$	(360	)	$	(384	)

In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net in the statements of consolidated income for the years ended June 30, 2018, 2017, and 2016, respectively.

The estimated net actuarial loss for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $185. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $121 and $369, respectively.

Assumptions

A discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.

The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows:



	Pension Benefits				Retiree Health Care Benefits
June 30,	2018		2017		2018		2017
Assumptions used to determine benefit obligations at year end:
Discount rate	3.5	%	2.8	%	3.8	%	3.3	%
Assumptions used to determine net periodic benefit cost:
Discount rate	2.8	%	2.3	%	3.3	%	2.9	%
Expected return on plan assets	7.0	%	7.0	%	N/A		N/A

The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.0% as of June 30, 2018 and 2017, respectively, decreasing to 5.0% by 2027.

A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2018 and for the year then ended:



	One-Percentage Point
	Increase		Decrease
Effect on total service and interest cost components of periodic expense	$	9	$	(8	)
Effect on post-retirement benefit obligation	152		(130		)

Plan Assets

The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan is valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30:



	Target Allocation	Fair Value
		2018		2017
Asset Class:
Equity* securities (Level 1)	40 – 70%	$	6,226	$	3,880
Debt securities (Level 2)	20 – 50%	1,337		2,538
Other (Level 1)	0 – 20%	139		112
Total	100%	$	7,702	$	6,530

* Equity securities do not include any Company common stock.

The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.

Cash Flows

Employer Contributions

The Company expects to contribute $3,300 to its pension benefit plans and $130 to its retiree health care benefit plans in fiscal 2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years:



During Fiscal Years	Pension Benefits		Retiree Health Care Benefits
2019	$	3,700	$	130
2020	3,800		120
2021	1,300		110
2022	1,300		110
2023	1,400		100
2024 through 2028	5,200		530